What does Xeros Technology Group plc's (LON:XSG) Balance Sheet Tell Us About Its Future?

Xeros Technology Group plc (LON:XSG), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is XSG will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean XSG has outstanding financial strength. I will go over a basic overview of the stock's financial health, which I believe provides a ballpark estimate of their financial health status.

View our latest analysis for Xeros Technology Group

Is financial flexibility worth the lower cost of capital?

There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either XSG does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. XSG delivered a strikingly high revenue growth of 56% over the past year. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.

Can XSG pay its short-term liabilities?

Given zero long-term debt on its balance sheet, Xeros Technology Group has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. Looking at XSG’s UK£2.7m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of UK£19m, with a current ratio of 6.83x. However, a ratio greater than 3x may be considered high by some.

Next Steps:

XSG is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around XSG's liquidity needs, this may be its optimal capital structure for the time being. Moving forward, XSG's financial situation may change. Keep in mind I haven't considered other factors such as how XSG has been performing in the past. I suggest you continue to research Xeros Technology Group to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for XSG’s future growth? Take a look at our free research report of analyst consensus for XSG’s outlook.
2. Historical Performance: What has XSG's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.